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Why Shares of Watsco Gained 10.7% in April

By Lou Whiteman – May 8, 2019 at 10:32AM

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Investors remain optimistic even after first-quarter growth failed to materialize as expected.

What happened

Shares of Watsco (WSO 4.25%) climbed more than 10% in April, according to data provided by S&P Global Market Intelligence. Investors looked past tepid first-quarter growth and focused instead on the heating, ventilation, and air-conditioning parts distributor's optimistic outlook.

So what

Growth was an issue for Watsco going into the release of its first-quarter results, and the company's numbers did little to dispel those concerns. Revenue climbed by just 0.5% in the quarter to $931.3 million, short of the 2% growth that had been expected, and earnings of $0.88 per share, while matching expectations, were down 1% year over year.

An air conditioner repair technician checks the levels on an outdoor unit.

Image source: Getty Images.

The growth wasn't what some had hoped for, but that's not to say Watsco is doing poorly. The company said the quarter marked new highs in sales, operating profit, same-store operating margins, net income, and cash flow, all while dealing with difficult weather in some markets.

Watsco operates from a network of more than 500 locations in the U.S., Canada, and Mexico, and is the largest player in a highly fragmented business. Sales are more than double those of its nearest competitor, positioning it to weather any eventual economic downturn.

Now what

In the quarter, Watsco added DASCO Supply, expanding its presence in the Northeast. During a call with investors, management said it is still hunting for further additions.

"We continue to seek additional opportunities to grow our network," CEO Albert H. Nahmad said. "We believe ... this is an ideal time for owners to engage with us, and I hope they do."

WSO Chart

WSO vs. S&P 500 data by YCharts.

Watsco might not have delivered the growth that was expected in the quarter, but the company shows no sign of wavering from a strategy that has allowed it to significantly outperform the S&P 500 over the past 15 years. Investors, to their credit, appear focused on the long term and not the first-quarter results.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Watsco. The Motley Fool has a disclosure policy.

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